Taxpayer Aid Sought for Mortgage Bond Trading: Australia Credit

By Rachel Evans -
Apr 7, 2014

A year after taxpayer support for
Australia’s mortgage bonds ended, lenders want it back as
issuance languishes at half the levels seen before the global
financial crisis.

Deutsche Bank AG predicted last month sales of residential
mortgage-backed securities will slip to A$23 billion ($21.4
billion) in 2014, down from last year’s A$26.1 billion, the most
since 2007 when issuance was double that amount. The government
should restart RMBS purchases, focusing on the secondary market
to encourage investment, the Australian Securitisation Forum, an
industry association whose members accounted for 94 percent of
last year’s issuance, wrote in a submission to the Financial
System Inquiry dated March 31.

A year after the government judged the market had returned
to health and ended a A$20 billion support program, issuers say
trading volumes have failed to revive despite a housing boom
fueled by record-low interest rates. The industry body will have
to persuade Prime Minister Tony Abbott, who is focused on
spending cuts and says he doesn’t believe in a “government by
checkbook.”

“One of the biggest issues with Australian RMBS is that in
the secondary market, there’s not a great deal of turnover and
that tends to put off some foreign investors,” said James Austin, chief financial officer at Firstmac Ltd., a Brisbane-based non-bank lender that sold A$1.64 billion of mortgage notes
to the Australian Office of Financial Management. “To the
extent that the AOFM could play a role in promoting market
turnover, that would be a good outcome,” he said by phone on
April 1.

Offshore Issuance

About half the almost A$50 billion of mortgage debt sold by
the nation’s lenders in 2007 was denominated in a foreign
currency, according to the ASF’s report, citing data from
Macquarie Group Ltd. Issuers haven’t sold any new foreign-currency bonds this year after sales slumped 39 percent in 2013
from a year earlier, data compiled by Bloomberg show.

Offshore demand for home loan-backed bonds was a
“significant factor” in boosting Australian issuance and
compressing costs before the financial crisis, according to the
ASF. While overseas accounts are still buying Australian dollar-denominated mortgage-backed bonds, poor secondary-market
liquidity is inhibiting their return, the ASF said.

“Most managers and asset consultants see the securities as
being illiquid, so that influences how much they buy,” said
Chris Dalton, chief executive officer of the organization. “For
the AOFM to continue to buy and sell over time could provide
another useful component to helping liquidity in the secondary
market,” he said by phone from Melbourne on April 3.

Government Purchases

The AOFM would ideally be permitted to buy notes in either
the primary or secondary markets, Dalton said. This would
maintain the agency’s experience and expertise with the asset
class and allow the government to efficiently deploy support if
another market shock made that necessary, he said.

The ASF is also lobbying for an exchange facility, run by
the AOFM, which would allow funds to switch discounted RMBS for
government bonds during market disruptions.

Credit growth in Australia is slowly picking up, Reserve
Bank of Australia Governor Glenn Stevens said in a statement
April 1 after holding the cash target at 2.5 percent. The
central bank has cut its benchmark rate by 225 basis points
since late 2011 to stimulate lending. The benchmark 10-year bond
yield fell to 4.07 percent as of 3:08 p.m. today in Sydney from
4.51 percent before the RBA started its current cutting cycle.

Home Prices

Housing finance climbed 5.8 percent in February from a year
earlier, the biggest jump since September 2011. Firstmac is
writing an average A$140 million to A$150 million of new loans
every month, back to levels last seen before the financial
crisis, according to CFO Austin.

Home prices in Australia’s capital cities rose 10.6 percent
in the year through March 31, the biggest annual gain since July
2010, according to the RP Data-Rismark Home Value Index. Prices
rose 2.3 percent last month from February, the measure shows.

Late payments of more than 90 days rose to 0.57 percent in
January from 0.53 percent a month earlier, according to Moody’s
Investors Service. That compares to a 1.9 percent delinquency
rate in the U.K. in the three months through August, the ratings
company wrote in a report published last week.

Australian banks, from the nation’s four majors to regional
lenders, are paying the least to sell mortgage-backed bonds
since the financial crisis. Issuers that were frozen out of the
market through the crisis due to ballooning costs are also
returning, with Columbus Capital Pty and Bluestone Group Pty
pricing their first offerings since the financial crisis.

Market Functioning

“I like the idea that people are thinking about what to do
in times of stress but when markets are functioning reasonably
well, I think it’s better to let the market work out its own
levels,” Peter Casey, deputy treasurer at ING Bank Australia
Ltd., said April 2. “We’ve seen good demand come through over
the last few years with a very solid base of investors. That
investor base may look different to seven years ago but it seems
to be more sustainable.”

The government bought A$15.5 billion of RMBS between
October 2008 and April 2013 to foster competition in Australia’s
mortgage market after funding costs blew out following the
collapse of subprime lending in the U.S. The AOFM’s mandate
restricted purchases to the primary market.

The government now owns just over A$7 billion of the debt,
according to the AOFM’s Michael Bath. The agency has selectively
sold notes since March 2010 “in the interests of secondary
market transparency,” according to its website. The case for
further sales this year is however not strong after the agency
sold down its holdings of mezzanine RMBS, Bath said in an April
2 phone interview, speaking as acting chief executive officer.

Financial Inquiry

“It’s not for us to comment on what the government may or
may not tell us to do,” said Bath, when asked about the ASF’s
proposals. “It clearly would represent a significant change to
our mandate if we were to either make a market or be a buyer of
last resort under some sort of facility arrangement.”

The Financial System Inquiry is reviewing Australian
markets to create a blueprint for the nation’s financial sector.
The committee is due to release an interim report in mid-2014
and then consult the market again on its conclusions. Any
changes that result after the panel makes its recommendations to
the government in November aren’t likely until well into 2015,
according to the ASF’s Dalton.

“The market could certainly do with more liquidity but I’m
a bit reserved about expectations for significant volumes of
turnover occurring in short periods of time,” Stephen Maher,
head of debt markets analysis in the fixed income and currencies
team at Macquarie Bank Ltd., said April 3. “It’s a buy and hold
market.”